Will Tech Stocks Lead the Recovery?

Tech Will Lead the Recovery

While we have no idea when the market will begin to recover, one thing appears clear - the fact that technology companies are best positioned to lead the recovery. As far as we can tell, the recent rally was a major head fake. There's still $3 trillion (according to the IMF) of write-downs coming for the major banks (so far, they've only reported $1 trillion), much more job cutting on the way, more housing troubles, major shrinkage in retail and manufacturing, and a laundry list of woes that make the light at the end of the tunnel appear farther away than it might be.

Regardless, at some point the economy will recover, and at that time technology companies appear to be best positioned to lead the bull charge. Why? Apparently they learned their lesson the last time around.

Tech Companies Learned from the 2001 Crash

The crash in market capitalization of the technology sector during the 2001 bursting of the tech bubble was unprecedented - billions upon billions of dollars flushed down the toilet, and high flying P/E ratios of tech companies whose share prices had been soaring out of control, and not backed by any tangible book value or profit margins. In the past eight years, however, technology companies have learned their lessons. Companies such as Google (GOOG), IBM (IBM), Cisco (CSCO), Apple (AAPL), Microsoft (MSFT), Intel (INTC), Texas Instruments (TXN), Hewlett-Packard (HP), Silicon Labs (SLAB), and Corning (GLW) are flush with cash on their balance sheets. And they were quick to make production and inventory cuts to keep margins as stable as possible while the recession kicked into full gear. As a result, we feel the above tech stocks are among those best positioned to benefit from an eventual economic recovery.

Which are the Best Tech Stocks to Invest In?

Okay, so we gave you a laundry list of tech stocks above, but would we necessarily put all of them in our portfolio? The answer is no, as some are definitely better positioned than others - not only in terms of product mix but competitive advantage. Those stocks are:

• Google (GOOG) - while the pundits are waiting for Google to take a long-waited hit in revenue and profit forecasts, based on the fact that the recession is curtailing ad dollar spending - we feel that the shift to online spending and search, in combination with the projected growth of the search industry over the next few years, merits a closer look at Google.
• Microsoft (MSFT) - while we're huge fans of the open source movement, we've been following the release of Windows 7 closely, and feel that it improves in such a huge way over Windows Vista that Microsoft will benefit from its sales once again (Microsoft makes over 50% of its revenue from Windows sales).
• Intel (INTC) - Intel is in a great position to take advantage of the new, lower priced Netbooks market. While PC sales have slowed, the adoption of the newer, cheaper, smaller and faster Netbooks has accelerated. Whether or not the bottom of the PC market is around the corner, we will much of the pain is factored into the recent share price.